9911796707
TMI Blog2007 (7) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... o deal in pharmaceutical and other kinds of chemicals and their intermediaries which is set out in the memorandum of association. The petitioner has produced latest audited balance-sheet for the year ending up to 30-6-2006, showing its assets and liabilities, a copy of which is produced at annexure B to the petition. The board of directors of the petitioner have approved and adopted the scheme by which the company intended entering into an arrangement with the shareholders for issue of fully paid non-redeemable debentures from general reserve in a meeting held on 8-9-2006. The relevant Board resolution is produced as annexure C. In paragraph 7 the salient features of the said scheme are clearly set out. 3. The petitioner filed C.A. No. 1277 of 2006 before this Court for suitable directions regarding holding of meeting of equity shareholders and unsecured creditors of the company to consider the aforesaid scheme. By an order dated 13-10-2006, the petitioner was directed to convene the meetings of its equity shareholders and unsecured creditors for the purpose of considering and approving with or without modification of the said scheme. In terms of the aforesaid order Mr. Darious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is against the provisions of section 77 of the Companies Act, 1956, as subscription to securities issued by the company are funded from the company s sources. Lastly, it was contended that, under section 117C(1) of the Act, where a company issues debentures, it shall create a debenture redemption reserve for the redemption of such debentures, to which adequate amounts shall be credited, from out of the profits every year until such debentures are redeemed. Further, sub-section (2) of section 117C provides that the amount credited to the debenture redemption reserve shall not be used by the company except for the aforesaid purpose. The company has sought for dispensing with the creation of a debenture redemption reserve which cannot be permitted. Therefore they have sought for appropriate orders to be passed. 6. I have heard learned counsel for the parties. 7. Insofar as the objection regarding non-compliance of section 117C of the Companies Act is concerned, the petitioner has filed an affidavit on 30-3-2007, giving up the prayer for dispensing the creation of a debenture redemption reserve and they have undertaken to comply with section 117C of the Companies Act and creat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any bonus debentures out of the free reserves to their shareholders. 10. Section 2(12) of the Act defines what a debenture is. Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. Section 82 of the Act provides for nature of shares and debentures. In the entire scheme of the Act there is no reference to a bonus debenture. 11. In the Company Law by Robert R. Pennington, eighth edition, dealing with the capitalizations, bonus issues and dividends in specie, the learned author has stated as under : "If a company has power by its articles simply to pay dividends, or if its articles are silent on the manner in which dividends shall be paid, the company may distribute dividends only in the form of cash. It cannot declare a dividend of so much per share and resolve that the dividend shall be satisfied by the allotment of further shares or debentures of a corresponding nominal value credited as fully or partly paid. It is common, however, for articles to contain a power for the company by passing an ordinary resolution in general meeting on the recommendation of its directors ( a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epayment, does not rank as a distribution. It should be appreciated that distributions are chargeable to Income-tax Schedule F, and in the hands of the recipients (the shareholders), distributions are liable to surtax. This includes capital dividends." (p. 517) 13. In the case of Shashibala Navnitlal v. CIT [1964] 54 ITR 478, a Division Bench of the Gujarat High Court held as under : "These bonus shares may be either ordinary or preference shares on the one hand or redeemable preference shares on the other. The company may also instead of issuing bonus shares issue bonus debentures by capitalising its accumulated profits. In all these cases the accumulated profits which are capitalised remain in the coffers of the company and no part of them actually goes into the pockets of the shareholders : the only change that takes place is that the accumulated profits which prior to capitalisation were employed in the business as accumulated profits are thenceforth employed as part of the issued or loan capital of the company according as the issue is of bonus shares or bonus debentures. The accumulated profits which might have been divided among the shareholders as dividend are imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t takes place is that the accumulated profits which prior to capitalisation were employed in the business as accumulated profits are thenceforth employed as part of the issued or loan capital of the company according as the issue is of bonus shares or bonus debentures. The accumulated profits which might have been divided among the shareholders as dividend are impounded to increase the capital of the company and what the shareholders get is not any payment out of the accumulated profits but bonus shares or bonus debentures credited as fully paid-up. When such bonus shares or bonus debentures are issued, admittedly no moneys are paid by the shareholders for the bonus shares or bonus debentures issued to them. There is no payment of the accumulated profits to the shareholders since no part of the accumulated profits is liberated to them. The company does not part with any of the accumulated profits nor do the shareholders receive any part of them. But the accumulated profits are applied in paying up the capital sums which the shareholders would otherwise have had to contribute for the purchase of new shares or new debentures. 16. Clause 172 of the Articles of Association of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority to support it, clearly based on sound principle. There is no legal impediment. This is a well accepted practice. However, the scheme is conditional and subject to the requisite sanction or approval from other concerned authorities being obtained and granted in the matter in respect of which sanctions or approvals shall be required. The sanction accorded by this Court to the scheme of arrangement is always subject to such sanctions or approval that is required from the concerned authorities. 18. As already stated, the said scheme has been approved by both the shareholders and creditors of the company. After due publication of hearing of this petition, no one has appeared before this Court to oppose the said "scheme of arrangement". In that view, I do not find any substance in the last objection raised by the Registrar of Companies. 19. Hence, I pass the following order : ( i )Petition is allowed. ( ii )The "scheme of arrangement" proposed by the petitioner is accorded sanction subject to the compliance under section 117C of the Companies Act, as well as sanction or approval from the concerned authorities, if required under law. ( iii )The petitioner to serve ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
